Arcos Dorados Holdings, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Key Highlights: U.S. dollar revenue set a new high for the third quarter, guests count rose for the 14th consecutive quarter, systemwide comp sales increased by over 32%, and US dollar EBITDA was the second highest. Digital, Delivery, and Drive-thru platforms were key competitive advantages. 56% of Experience of the Future restaurants were opened year-to-date, and the company was on track to meet 2024 restaurant opening guidance.
• Digital and Loyalty: Digital sales grew 16%, accounting for 58% of systemwide sales. The McDonald's app was downloaded 140 million times with 94 million unique registered users. Delivery and Drive-thru sales grew 43% year-to-date compared to 2021. The Loyalty Program had 14 million registered members in Brazil, Costa Rica, and Uruguay, with plans to roll it out to other markets.
• Strategy: Focus on 'Development' as the fourth D of the strategy. The balance sheet was strong, and Moody's upgraded Arcos Dorados' debt rating. The company opened 19 Experience of the Future restaurants in the quarter and was on track for 2024 capital expenditures.

Segment Performance

• Brazil: Third quarter comp sales rose 6.8% on top of double-digit growth from the prior year. Digital channels (Mobile App, Delivery, Self-Ordered Kiosks) accounted for almost 70% of sales. Drive-thru sales growth was strong. Marketing activities included campaigns like 'Méqui, Méqui', 'Shira swimming pool', etc. US dollar sales were affected by the devaluation of the Brazilian real.
• NOLAD (Mexico): Comp sales increased 6.2% with higher guest counts driving most of the growth. Digital channels made up 40% of sales in the quarter, up from 30% the previous year. Marketing initiatives focused on family-oriented menu items and a collaboration with BTS.
• SLAD: Comp sales grew 90.4%, with the impact of Argentina's high inflation over the last 12 months. Excluding Argentina, comp sales rose significantly. Digital sales accounted for 57% of the division's sales. Argentina's inflation declined, but the currency remained weaker. Marketing activities emphasized value perception and a collaboration with BTS.

Guidance

• Full-year 2024 EBITDA was expected to beat the prior year's result in US dollar terms with a flattish margin.
• Expectations to gain efficiencies through digitalization and market-to-market operations.
• Plan to roll out the Loyalty Program to remaining markets.
• On track to meet the 2024 restaurant opening guidance.

Risks

• Currency devaluations impacted results, particularly in SLAD.
• Macroeconomic and consumer challenges in some markets.
• Labor and occupancy cost pressures in NOLAD and SLAD.
• Uncertainty surrounding future labor reforms in Brazil, such as the potential end of the 6x1 labor regime.

Question and Answer

• Q: How is the competitive environment in Brazil, especially regarding promotional activity? **A: The competitive landscape was similar to the rest of the year, with a focus on a compelling value proposition and restaurant experience to drive volume growth.
• Q: What is the impact of the post-elections macroenvironment in Mexico? **A: Mexico was performing well with strong comp sales, and it was in the early stages of digitalization, with the mobile app gaining popularity.
• Q: What is the outlook for food and paper costs in Brazil, and how do protein prices impact margins? **A: The modest increase in food and paper costs in Brazil was not related to specific protein prices, but some pressure was expected in the next year, which would be managed through pricing and mix adjustments.
• Q: What is the status of digital and delivery penetration, investments, and profitability? **A: Digital sales grew 16%, delivery grew 14%, with marginal contributions positive. The company was working on a scalable logistic model for home delivery.
• Q: What is the impact of the potential end of the 6x1 labor regime in Brazil on labor costs? **A: Details of the labor reform were still awaited, and more information would be provided in future calls.
• Q: What are the consumption and sales trends, EOTF rollout in Mexico, and labor cost expectations for next year? **A: Mexico was performing well, with EOTF rollout ongoing, and sales growth helping offset labor cost pressures.
• Q: What is the outlook for food and paper costs and FX hedges? **A: The company hedged 50% of projected food and paper exposure in key markets through Q1 2025, with hedging planned for Q2-Q3 2025.
• Q: What are the prospects for Venezuela and Argentina? **A: Venezuela was not a material contributor to results, while Argentina was resilient with sequential improvements, expecting recovery in early 2025.
• Q: What are the drivers of Brazil's growth, comp sales, and delivery and drive-thru performance? **A: Comp sales in Brazil were driven by average check, Drive-thru accounted for ~20% of sales, and delivery was growing faster.
• Q: What is the next three-year plan and ROIC expectations? **A: The plan was to open 90-100 restaurants in 2025, with ROICs at or above historical averages, focusing on freestanding and mall stores.
• Q: What is the impact of identified sales and examples? **A: Identified sales were ~25%, with a personalized experience leading to higher frequency, margins, and top-line acceleration.
• Q: What is the reason for same-store sales deceleration in Brazil and the outlook for 2025 consumption? **A: Brazil continued to show strong growth, outperforming competitors, with a focus on a value proposition for 2025.
• Q: How is capital deployment considered relative to FX assumptions? **A: ROI was measured in dollar terms, considering market potential and risk, with analysis based on McDonald's brand strength.